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Bank Overdraft Fee Revenue Is on the Rise

Posted by: Gideon Weissman on

Tags: CFPB , banks

Today we released Big Banks, Big Overdraft Fees, an analysis of bank revenue from overdraft fees – fees charged to consumers who withdraw money from their checking account to below zero, in excess of their current account balance.

These fees, typically around $35, have become notorious in recent years for their confusing and sometimes deceptive nature, and for the high costs they impose on consumers that can least afford them. Overdraft fees are widespread enough that during the course of my work on this report, casual conversations with friends and family turned up many examples of bad overdraft experiences. In one case, my teenage cousin who had recently opened his first checking account was shocked to look at his balance and find that fees had been piling up– not just a one-time overdraft fee, but also additional charges assessed when his account remained overdrawn for more than a week.

Overdraft programs are usually pitched as a convenience to let consumers avoid the hassle of a denied transaction – one of the banks that we found collects among the most overdraft revenue from its customers, Woodforest National Bank, says “Rainy days never seemed so bright with our Overdraft Solutions.” In practice, however, overdraft programs are more likely to be a source of consumer pain than convenience, often leaving consumers confused and unhappy.

Banks play a crucial role in society: They keep our money safe and put it to work. But today, banks are making an increasing amount of money from the fees they collect from their customers. In our analysis, we found that large banks reported collecting $8.4 billion in overdraft fees in the first three quarters of 2016 – a 3.6% increase over the same period in 2015.[1] We also found that some banks rely very heavily on overdraft fee revenue. Without overdraft fee revenue, five banks would have seen a net income loss through the first three quarters of 2016.

Overdraft fees are often confusing and poorly understood – but their complexity is far from unique for consumers navigating the financial marketplace. That’s why it’s so important that consumers today have a powerful ally when it comes to dealing with banks, lenders, and other financial companies: the Consumer Financial Protection Bureau, the federal agency dedicated to standing up for consumers in the financial marketplace.

The CFPB only began operation in 2011, but has already proved its worth many times over, including by returning $12 billion to harmed consumers. When it comes to overdraft fees, the CFPB’s work has included enforcement of the overdraft “opt in” rule that bans banks from charging overdraft fees at ATMs and debit card transactions unless the customer signs up for overdraft protection. The CFPB has also urged banks to offer low- or no-fee accounts to their customers. Our analysis also found that banks supervised directly by the CFPB (banks with more than $10 billion in assets) collect less overdraft fee revenue per account than banks supervised by other federal agencies, evidence that the CFPB’s supervisory program may be helping protect consumers from unfair fees.

Unsurprisingly, while the mission of the CFPB has broad support from the public, it is far less popular with the industry that it oversees. The CFPB has been the subject of an endless string of attacks by the banking industry; these attacks have been extensively covered by U.S. PIRG’s Ed Mierzwinski, who co-authored the new report.

The CFPB could have an even tougher road ahead. Donald Trump has stated his interest in “dismantling” the 2010 Dodd-Frank law, which created the CFPB. Trump will be able to immediately weaken the agency by removing its director, Richard Cordray, because of an October 2016 federal court ruling that presidents can remove the CFPB's director at will.

Dismantling or weakening the CFPB would be an enormous blow to consumers – it would also undermine trust in the banking system, already so damaged by the 2008 financial crisis. With bank overdraft revenue on the rise, it’s more important than ever that the CFPB continue to stand up for consumers.

 

[1] This total also includes nonsufficient fund (NSF) fees charged for bounced checks. NSF fees likely account for about a fifth of reported revenue, according to the Center for Responsible Lending.